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Posted October 2014

 

Market Commentary


 

Waning Bullish Sentiment or Bumps in the Road?

“You can live to be a hundred if you give up all the things that make you want to live to be a hundred!”  ~ Woody Allen

THE QUARTER IN BRIEF:   Bullish sentiment seemed to wane in the latter part of September.  The S&P 500 closed at a new high on September 18th.  Although closing up 1.13% for the quarter, the index fell 1.8% from that mid-month peak.  For the trailing one year, the index was still up a solid 19.73%.  While most indicators showed the economy continued to have moderate growth, troubling headlines from Asia, the Middle East, and Eastern Europe weighed on investors collective minds.  The Federal Reserve described the interval between the end of easing and the alteration of the benchmark interest rate as a “considerable” time.  While welcome news, “QE3” continued to be tapered on schedule with the final cut on the body’s October meeting agenda.  Given this oncoming shift in U.S. monetary policy, questions emerged about how much fight was left in the aging bull market.   
       
DOMESTIC ECONOMY:  Shoppers opened up their wallets during the summer months with retail sales rising throughout the quarter.  The increase in spending could be attributed to two major factors.  First, households were not facing inflationary pressures as price indices showed yearly gains of 2% or less.  Secondly, employers added over 600,000 jobs which helped bring the unemployment rate down to 5.9%, which was .2% less than at the beginning of the quarter.  Although the summer saw a large fluctuation in durable goods orders, the influential purchasing manager indices (PMIs) for both factories and services continued to show solid expansion.  This followed estimates of 2nd quarter GDP growth at better than 4%.  In real estate, new home sales continued strong although sales of existing homes was relatively flat.  The increase in home prices moderated from the double digit annualized increases in 2013.  The S&P/Case-Shiller home price index comprised of 20 major metro areas showed home values increased by 6.7% over the past 12 months.  Mortgage rates, although rising slightly during the quarter, continued to be attractive to buyers.  
        
GLOBAL ECONOMY AND MARKETS:  Investors monitored fluid geopolitical situations on multiple continents.  In the Ukraine, a shaky truce with Russia threatened to collapse as Russian separatists were again inflicting casualties on Ukraine’s military and civilians.  In Syria, the U.S. led air strikes against ISIS positions, including captured oil refineries.  It was reported that the terror organization was reaping as much as $3 million daily smuggling fuel from Syrian oil refineries.  In China, pro-democracy protests in Hong Kong escalated and raised the fear of more violence if China chose again to take a hard line against such demonstrators.  Speaking of China, its latest official factory PMI showed mild expansion and remained relatively unchanged for the quarter.  The PRC also announced economic incentives to encourage home buying and assist real estate developers.  Key manufacturing gauges in other parts of the world were also unimpressive.  The Eurozone had its poorest reading in 14 months (50.3), raising the likelihood that the European Central Bank would initiate its own easing campaign.  World markets reflected the tepid economic news with the MSCI World Index declining 2.16%, while the MSCI Emerging Markets Index posted a loss of 3.49%.

A LOOK AHEAD:  At the end of the 3rd quarter, the S&P 500 index was on its fifth –longest stretch without a correction since 1928.  Octobers have produced some famous market events over the years and this quarter has begun with major market volatility and sharp drops in all the major market indices both in the U.S. and around the globe.  Much of the volatility has been blamed on recent world events and global economic data.  Whether this is merely a somewhat expected and temporary market pull back after such prolonged growth will depend upon the upcoming U.S. economic data including quarterly earnings reports, economic indicators, job growth, consumer spending, and 3rd quarter GDP growth.  Overall, the data is expected to be positive.  If these come in below expectations, October and this quarter may throw more challenges at the markets than we have seen for some time.  If favorable, we should look to recover much of the early October drop and have growth once again for the quarter.  In the end, economic data is the driving force behind market returns.  One needs to keep that simple fact in mind and not get caught up in the emotion of daily headlines.  Hanging on and settling in for the ride, however bumpy it may be at times, has always proven to be the best course of action to follow.

Investors cannot invest directly in indices.  The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.